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Martha Stewart Living Omnimedia, Inc. (NYSE:MSO)

Q3 2008 Earnings Call

October 28, 2008 11:00 am ET

Executives

Howard Hochhauser - Chief Financial Officer

Charles Koppelman - Executive Chairman

Robin Marino – President, Merchandising

Wenda Harris Millard - President, Media

Analysts

Richard Ingrassia - Roth Capital Partners

David Kestenbaum - Morgan Joseph & Co. Inc.

Michael Meltz - J.P. Morgan

Michael Kupinski - Noble Financial Group

David Bank - RBC Capital Markets

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia third quarter 2008 earnings conference call and webcast. (Operator Instructions)

Mr. Hochhauser, you may begin your conference.

Howard Hochhauser

Thank you and good morning, everyone. Welcome to our conference call to review third quarter 2008 results.

Charles Koppelman, our Executive Chairman, will begin by providing an overview, then our co-CEOs, Robin Marino, President of Merchandising, and Wenda Harris Millard, President of Media, will bring you up to speed on our businesses. I'll come back on to talk about our recent performance and outlook for the fourth quarter.

Before turning the call over to Charles, let me remind you that our discussions will contain forward-looking statements which are made pursuant to the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors.

Now let me turn things over to Charles.

Charles Koppelman

Thank you all for joining us this morning.

MSLO delivered solid results in the third quarter, meeting the expectations we laid out in July. Yes, economic times have gotten tough, but our great brands, hardworking founder, and diverse media and merchandising platforms provide us with stability in difficult times. Our platforms provide great value to our customers.

We're seeing that in our performance this quarter, including the Emeril Lagasse business, which is proving to be everything we thought it would when we bought the company. We more than doubled adjusted EBITDA in our Merchandising business. Our Broadcasting business also had a terrific quarter, generating $3 million in adjusted EBITDA compared with a $1 million loss in last year's quarter. Despite the advertising downturn, Publishing has added new advertisers in a few categories and rates are holding pretty firm. Finally, our Digital business continues to grow, with ad revenue up 35%, and we're seeing continued increases in Internet revenue and visitor metrics.

Overall, the company generated $6 million in free cash flow in the quarter and maintains a clean, strong balance sheet that gives us flexibility to invest in and grow the business. We've done that this year with deals like Emeril and WeddingWire and just today have announced our agreement to invest in Pingg Corp., an online event management site that is a great fit with our Internet strategy.

As we look ahead, our sweet spot is our ability to give the content, ideas, tools and products that our consumers want and expect from us. As we grow, our goal is to deliver all of those things across every channel, every brand, including new brands that we develop or acquire in the future and in more markets outside the U.S.

To that latter point, we are getting deeper into our exploration of international opportunities and are excited by what we see. Both at home and abroad, we continue to see strong and broad interest from companies that want to partner with us. That's because we offer something unique  a winning combination of proven brands, loyal and enthusiastic customers, and a group of platforms that provide myriad and creative ways for marketers to speak to these customers.

Of course, we are closely monitoring the broader economic climate and while it would pose challenges for any consumer-oriented company, we nevertheless feel good about our potential. Our business is healthy and we have exciting opportunities in front of us. At the same time, we're applying rigor and discipline to our operating expense decisions and taking prudent steps that should strengthen the company's performance now and into the future.

Howard will speak more specifically to our outlook for the balance of 2008 in a few moments. In the meantime I'll sum up by reiterating that the third quarter was a very good result at MSLO and we look forward to keeping you updated on our performance and exiting initiatives.

Now I'd like to turn the call over to Robin, who will discuss business segment trends in the quarter.

Robin Marino

Thank you, Charles, and thanks to everyone for joining us today.

The Merchandising segment performed exceptionally well in the quarter, with revenue up 33% and adjusted EBITDA up a stellar 118% year-over-year despite a challenging retail and consumer spending environment. Sales trends across our portfolio of products were encouraging. This demonstrates that we're striking the right chords with the new products we're introducing and that those products are being offered at the right prices and at locations our consumers find accessible and desirable.

Now, a few highlights I'd like to share. We continue to be pleased with the performance of the Martha Stewart Collection at Macy's, especially in the context of the current economy. Our products are resonating with customers and continue to be top sellers in their respective categories. Macy's is putting a lot of emphasis on our collection this holiday season. The assortment includes gift-focused packaging and displays that drive home the idea for holiday shoppers that our products provide the right combination of style and value they're looking for.

The expansion of our crafts line into Wal-Mart is meeting with a very good reaction from customers. Our core crafts business at Michael's and independent retailers remains consistent, and we've had a great response to our new Halloween product offerings. Our craft tools have also been popular, especially our assortment of punches.

We continue to be pleased with the performance of our Flowers program with 1800FLOWERS.COM. Year-over-year, the number of orders are significantly higher, as are our revenue and average order value. We look forward to the introduction of our gift basket program in the fourth quarter.

Also in Q4 we will be introducing several new products at Costco that will be perfect for fall and winter entertaining. The products include some new offerings in the hors d'oeuvre category as well as the return of our Kirkland Signature Martha Stewart favorite holiday ham.

Emeril continued to contribute in the quarter, with sales of his licensed kitchen and food lines, led by sales at All-Clad, and through television appearances on HSN.

Obviously on the minds of everyone will be the question of how our products will continue to sell in a recessionary environment. I'm not going to make predictions, but we and many of our retail partners believe 2009 will be a year when consumers focus on their home. Our customers will be surrounding themselves with family, friends, good food and things to do that bring people together. Everything we offer centers around these settings. So while we can't ignore the headlines in the business press, we do feel we're in a good position.

With that in mind, we have a pretty simple goal and that is to continue delivering high value quality products at the right price points, expand categories and channels, and continue to leverage the visibility our media platforms provide.

As Charles noted, we're also moving forward in developing opportunities internationally. We've had several discussions with both licensing and sourcing partners in a number of markets that make a lot of sense for the Martha Stewart brand. We look forward to keeping you updated on our progress.

And now I'll turn the call over to Wenda.

Wenda Harris Millard

Thanks, Robin.

As I look across the media platforms we operate here at MSLO, it's hard not to feel pretty good about our performance given what's going on in the industry. Charles mentioned the tough print ad market already, so I won't dwell on it. Instead, I'd like to focus on how we're leveraging our platforms and assets to manage through this environment.

So far I think we're doing a good job, and that's due to the strength of our print brands, the addition of Emeril to our ranks, and perhaps most importantly our [omni-ness]. While advertisers are increasingly cutting spending plans and making more last-minute buys, the fact is that if you can offer unique ways to reach customers that show strong potential ROI, marketers want to know about it.

Publishing has held up very well in terms of rates. Please also remember we have the comparison headwind of Blueprint, which was still publishing in Q3 of last year. Total ad revenue was down 18% excluding Blueprint as well as revenue from special issues in the prior year period, so we're holding our own in a tough market. We expect to see continued softness in print for the reminder of the year. We currently expect Q4 Publishing advertising revenue to be down in the high teens compared with prior year, with relatively firm rates helping make up for fewer pages. We've also initiated some production and circulation efficiency initiatives with a few of our titles that will help support our performance now and moving forward.

I also want to mention that we've expanded our international offerings in the quarter with the launch of Martha Stewart Weddings in the Philippines and in 2009 we will begin publishing Martha Stewart Living in Turkey and Israel as well as a Spanish-language edition of Everyday Food in Mexico. With these new magazines, along with our Polish edition of Martha Stewart Living and our established presence in broadcasting, we are securing what we believe is a valuable beachhead for our brands in the international marketplace and that beachhead will be more valuable as we expand our other platforms overseas.

Our Publishing business also encompasses books, and just last week Clarkson Potter published Martha Stewart's Cooking School, the latest title in a long line of hits. In September we signed a very exciting new multi-year 10-book project for Emeril with Harper Studio, a new imprint of HarperCollins. Emeril has a terrific track record in book publishing and we look forward to building on it. His first book with Harper Studio will focus on indoor and outdoor grilling and is expected to appear just in time for Father's Day 2009.

Now on to Internet advertising revenue, which continues to be a very good story. We were up 35% in the quarter and user metrics continued their strong momentum as well, with page views up 57% over the prior year's quarter. User traffic for our weddings content is up dramatically, early proof that our investment in WeddingWire is bearing fruit.

Charles mentioned the inventories we announced today in Pingg Corp., an online event management site that offers stylish invitations and easy to use event planning tools. We're investing in places where consumers are going, giving them not only content and ideas but the tools they need to put them into action.

We think we'll continue to outpace market growth in Digital though year-over-year comparisons will become more difficult in the fourth quarter as we go up against the impressive growth rates from last year.

Broadcasting had a terrific quarter, with revenue up 62% and adjusted EBITDA swinging to a positive $3 million versus a loss of $1 million last year. Emeril Green has gotten off to a great start. Meanwhile, the fourth season of the Martha Stewart Show launched on September 15th in new time slots and/or stations in certain markets and continues to resonate with our core demographic. We continue to execute well on product integrations, which is also helping results.

I mentioned at the beginning that our Omni platforms are playing a key role in the strength and resiliency our media properties are demonstrating. We're able to put integrated packages together that other publishers cannot match and advertisers know this. One of our newest Omni programs, one that uses all of our media platforms, is with MY M&Ms. MY M&Ms will be featured on the Martha Stewart Show, Martha Stewart Living radio, in the Holiday Workshop online on MarthaStewart.com, and in the pages of Martha Stewart Living and Everyday Food magazine.

Programs like this are firm evidence that we are delivering something truly unique in the marketplace and we will continue to leverage those advantages as we work through this environment.

Now onto Howard for the financial discussion.

Howard Hochhauser

Thank you, Wenda.

Total revenue in the third quarter was $66.5 million, generally in line with expectations. Recall that the prior year period included $2.6 million in revenues from the since-closed Blueprint magazine. All of our segments were pretty close to our outlook despite the weakening broader retail and advertising environments.

Adjusted EBITDA excluding a charge of $3.2 million was $3.8 million for the third quarter of 2008 relative to an adjusted EBITDA loss of $700,000 in the prior year period. The majority of the charge in the current quarter related to severance and other non-recurring corporate costs.

To put our recent reductions in context, as of quarter end we had 709 employees, down nearly 10% from September 2007. As part of our cost reduction efforts, during the quarter we also signed a sublease agreement which will allow us to reduce corporate overhead by approximately $1 million on a run rate basis.

Now for year-over-year performance on a segment basis.

Publishing revenue was down over the prior year's third quarter due to a decline in pages and shift in timing of special issues in addition to the discontinuation of Blueprint. Print advertising revenue decreased 18% while circulation declined 6% when excluding Blueprint as well as revenue from special issues in the prior year period, which will be published in the fourth quarter of this year.

Our Internet business continued gaining traction, with advertising revenue increasing 35% year-over-year. Total revenue was down year-over-year due to the change in recognition of Flowers revenue from our Internet business to our Merchandising segment, as discussed in our last earnings call, although importantly, units sold were up over 50%. Internet's adjusted EBITDA loss was $1.1 million in the third quarter compared with a loss of $1.7 million in the prior year period.

Broadcasting revenue increased 62% in the quarter due principally from Emeril's television programming, which contributed approximately $5 million in revenue in the quarter. This segment made a significant contribution to our operating performance, with adjusted EBITDA of $3 million.

Merchandising revenue and adjusted EBITDA both produced very strong gains, with revenue up 33% and adjusted EBITDA more than doubling a year ago. These gains were driven by a diverse group of initiatives including Emeril, which contributed approximately $1.8 million in revenue in the quarter, the broad rollout of our Martha Stewart Crafts, our new program with 1800FLOWERS, sales of Martha Stewart Collection merchandise at Macy's, and the true-up from Sears Canada. Sales of our products at K-Mart declined approximately 26%.

Our balance sheet remains very healthy, with a solid cash position and manageable debt. We finished the period ended September 30, 2008 with $73 million in total cash and cash equivalents and $22.5 million in debt. This represents a $7 million increase in cash from June 30th '08, of which $6 million was applied towards debt.

It's worth noting here that we continue to take a prudent approach to managing our expenses and our balance sheet given the current environment. As we have demonstrated as recently as today with our Pingg investment, we are committed to making strategic investments in growth. We believe the current environment could lead to additional attractive opportunities in the current months ahead, and we will evaluate those carefully as they present themselves.

Now I'll talk about the guidance for the fourth quarter of 2008.

On a consolidated basis, assuming we close certain transactions, we expect revenue for the fourth quarter to be approximately $83 million. We are targeting operating income of approximately $10.5 million and targeting adjusted EBITDA of approximately $15 million. As a reminder, the total minimum guarantee related to K-Mart for the contract year ended January 2008 - our fiscal '07 - was $65 million as compared to $20 million for the contract year ended January '09, our fiscal 2008. As a result, we expect revenue from KMart will be down approximately $38 million in the fourth quarter.

On a segment basis for the fourth quarter, Publishing will reflect softness in advertising with revenue of approximately $46 million and adjusted EBITDA of approximately $5.5 million. Advertising revenue is currently trending down in the high teens on a percentage basis year-over-year when excluding Blueprint.

Broadcasting revenue is expected to be approximately $15 million with adjusted EBITDA of approximately $4.5 million.

Internet continues to gain traction, with total revenue expected to be approximately $7 million. Adjusted EBITDA is expected to be approximately $2 million.

Merchandising revenues are expected to be approximately $15 million, driven by our newer initiatives, including Macy's, our Craft line's availability at Wal-Mart, our Flowers program with 1800FLOWERS, and the rollout of new SKUs at Costco. Adjusted EBITDA is expected to be approximately $11 million.

Corporate expenses are expected to be $8 million.

In closing, due to volatile and increasingly uncertain general economic and market conditions, '08 has been a tough year but, importantly, one that is demonstrating the core underlying health of our portfolio of brands. We are focused on creating long-term value by allocating our capital into strategic areas of growth.

Thank you for joining us on the call today and we will now turn it back to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Ingrassia - Roth Capital Partners.

Richard Ingrassia - Roth Capital Partners

Robin, Merchandising was steady in the quarter, obviously, while Macy's and KMart are reporting same-store sales declines that were, in a couple of cases, twice as high as the original forecast. Can you maybe break down MSLO's performance in category strength or was it strength of the SKUs themselves or maybe just smart guidance?

Robin Marino

Yes, I can for you. We don't normally give numbers out, but I'll tell you what's happening there.

We are remaining the number one most registered brand at Macy's, which is a very positive driver, and weddings are always happening, as you know. We're anniversarying our first year of business and so we've really expanded into the bestselling key categories, some of which include luxury bedding - and, by the way, luxury bedding is a very important aspect for us because it demonstrates the appeal for the better aspects of what we do and I don't see that changing. White wear, our cook's tools, enamel on cast iron cookware have all been really very strong.

And the other thing that's been great for us is that we've really worked on leveraging Martha's credibility in seasonal products to include a lot of giftable, seasonal programs that go in and out, whether it's Halloween, Thanksgiving, Christmas, Valentine's Day. So our business has been really, really staying on plan and we're very excited about that.

Richard Ingrassia - Roth Capital Partners

And maybe if you could say a little more about efforts to extend the brand into other categories, not necessarily at Macy's or K-Mart but in cleaning supplies, for example, or pets or anything else.

Robin Marino

Richard, we've got initiatives under way in both of those categories. Our research indicates that consumers are looking for cleaning products from us, and we are fortunate enough to have many people anxious to do business with us and we're in the selection process for cleaning, small appliance, pets, storage and organization to name a few - all areas where we feel we have strong brand equity.

Richard Ingrassia - Roth Capital Partners

I noticed in the November issue of Living there were four full pages from Meredith promoting their Better Homes & Gardens line of products at Wal-Mart. I'm just curious, I mean, is their retail initiative just too small to be of competitive concern or is this the need to grab out ad dollars where you can find them these days?

Robin Marino

We always say imitation is the highest form of flattery, and I think that we started something wonderful and probably, with Publishing being what it is these days, I guess Better Homes & Gardens feels that getting into the product space is prudent. And based on our profitability, I would agree with that decision. And we'll continue to do what we do well and we know that we'll outperform everybody in our space.

Operator

Your next question comes from David Kestenbaum - Morgan Joseph & Co. Inc.

David Kestenbaum - Morgan Joseph & Co. Inc.

First, can you give us some color on the economics on the Pingg deal?

Howard Hochhauser

I'll take it and then I'll hand it off to Wenda to talk about just the content and the product behind it. The economics behind it are very similar to WeddingWire. You should think of it as roughly a $2 million investment for an approximate, you know, just north of 20% equity interest. But importantly, there is a commercial agreement and ad sales agreement. I'll let Wenda talk about that.

Wenda Harris Millard

So I think in addition to being very excited to have the opportunity to participate in Pingg's growth, we will also be representing Pingg from a sales standpoint. So we will have the exclusive rights to sell Pingg, to sell the advertising for Pingg, out there in the marketplace. So there are a couple of ways that we've created, I think, a very strong relationship with this upandcoming company.

David Kestenbaum - Morgan Joseph & Co. Inc.

Does that raise your EBITDA margins for the Internet business, it gains in the advertising model?

Howard Hochhauser

Well, to the extent we're selling advertising for somebody else's website, it's a high margin business. You should also note that you then pick up a piece of their loss, which will run through our equity line. So in totality you have some margin diminution in the equity line. In the EBITDA segment you have some margin accretion.

David Kestenbaum - Morgan Joseph & Co. Inc.

Can you talk a little bit about the international business? How does your business model change when you - you said you were going to be producing some magazines internationally. What's the structure?

Wenda Harris Millard

Those are classic licensed arrangements. So we will work very closely with a particular publisher in any given country, but those are classic licensing arrangements very similar to what most magazines do in international markets.

David Kestenbaum - Morgan Joseph & Co. Inc.

Okay, so much higher margin than your current Publishing business?

Howard Hochhauser

Yes, that's right.

Operator

Your next question comes from Michael Meltz - J.P. Morgan.

Michael Meltz - J.P. Morgan

Howard, MSL in the quarter, you gave us the group advertising and circulation performance. What was MSL?

Howard Hochhauser

Yes, in my speech I gave performance excluding special issues and excluding Blueprint in the prior year, so what you're left with is really MSL and Everyday Foods, so I said 18% and 6% advertising and circ respectively. MSL modestly outperformed that, while Everyday Food modestly underperformed that.

Michael Meltz - J.P. Morgan

Okay, MSL modestly outperformed both of those, the 18% and the 6%?

Howard Hochhauser

Right.

Michael Meltz - J.P. Morgan

Typically about this time you guys assess rate base and rates for the upcoming year. Have you made any announcements there?

Wenda Harris Millard

Well, because we're selling into the January issues we haven't in fact, so we did take the rate base of Everyday Food up to $1 million effective with that issue, and we have also increased the rate base of Martha Stewart Living to be $2,025,000.

Michael Meltz - J.P. Morgan

Were there rate increases on top of that?

Wenda Harris Millard

Well, as you know, we've been doing very, very well on rates and that's been part of our strength in this year.

Michael Meltz - J.P. Morgan

But there aren't rate card - I understand you're lifting the rate base, but are there melded rate increases as well or no?

Wenda Harris Millard

Oh, you know what? I forgot to also mention. I was thinking about those two. Body + Soul, by the way, we took from $550,000 to $600,000 rate base, so I should note that as well.

Will there be rate increases? We are certainly out there in the market looking for those, yes.

Michael Meltz - J.P. Morgan

The guidance for the year, the $23 million adjusted EBITDA number, can you just explain the language that you're saying - it sounds like there's some small acquisitions that you're hoping to close soon or am I reading that wrong, you're actually just talking about licensing deals or merchandising deals that will come on hopefully near term? What's baked into that number?

Howard Hochhauser

Michael, for competitive reasons we really can't disclose what we're talking about.

Michael Meltz - J.P. Morgan

On the EBITDA number? I'm sorry, I mean on the guidance number?

Howard Hochhauser

We're in ongoing dialogues with some partners and just to not put us at a disadvantage we don't want to talk about it. But we're assuming - the guidance presupposes that we're going to close, not necessarily an M&A deal, but other deals which are ordinary course of business in the fourth quarter.

Michael Meltz - J.P. Morgan

And last question, you gave an FTE number, I think, of - what you'd say, 709 or something. Is that after all the recent headcount reductions or were there further - is that number lower after the most recent announcement?

Howard Hochhauser

No, that's basically our current number.

Michael Meltz - J.P. Morgan

The Macy's, I don't know who asked it earlier, you know, where are you trending on some of the lines. Can you give us a sense where you are on kind of an annualized sales basis at Macy's versus your kind of intermediate term target, the $400 million dollar you had pointed to when you had formed the alliance?

Robin Marino

Michael, we haven't been willing to give those numbers out with respect to Macy's request. But I will tell you this, that, for our fourth quarter look ahead, we do believe that we're in a much better position than we were a year ago having added quite a number of giftable seasonal programs that we think are going to really resonate with the consumer. So we have a very - we have as optimistic a view on the fourth quarter as we can.

Operator

Your next question comes from Michael Kupinski - Noble Financial Group.

Michael Kupinski - Noble Financial Group

I just wanted to ask a little bit because of the fact that Internet revenues - I know I asked this question in the past - I know that you've taken Flowers out of the Internet, but it seems just a little bit light to me, and I was just wondering if you can discuss the opportunities that you might have to kind of boosting that up a little bit - I know you're coming up against some tougher comps in the fourth quarter - and how you might layer your recent acquisition, Pingg, into the Internet and maybe help that.

And if you could just add whatever little color you might - I know it's a relatively small acquisition - but what Pingg might add in terms of revenues, maybe. Is it a profitable company? If you can give us any color on that acquisition?

Wenda Harris Millard

Sure. Well, just to make sure that we're grounded here, we took a 35% increase in ad revenue year-over-year, which at this point looks like it might be about triple what's going on in the rest of the industry, so that was very, very encouraging. Page views are up on a quarterly basis year-over-year 57%, and the other metrics - time spent, uniques, the business per uniques - all of these metrics are trending upward.

I think that with the integration of the WeddingWire tools, I think you will see continued improvement even on these metrics, and with the integration of Pingg into the site, Pingg has a lot of characteristics very similar to WeddingWire, so we're looking forward to that helping us as well.

So we have a lot of opportunity to expand in the video area. We have vast libraries of content here at the company, so we'd be looking to do that in the year ahead. So I see continued commitment here and growth for the Internet sector.

Michael Kupinski - Noble Financial Group

And in terms of the revenues from Pingg, are you disclosing how much that might contribute into the fourth quarter?

Wenda Harris Millard

Oh, into the fourth quarter? No.

Michael Kupinski - Noble Financial Group

Is Pingg profitable?

Howard Hochhauser

Just to put this in context, Pingg is a smallish company, so think of this as sort of a competitor to Evite. So the company's in start up/investment mode because they've had commercial success with the product. So we just closed actually last night and you can expect us to start selling the product, but this is really a 2009 ad revenue goal, not so much a 2008 goal.

Michael Kupinski - Noble Financial Group

In terms of your Costco relationship, I know that originally when you signed the deal you thought that you might have, I think, if I recall, over 20 SKUs and I was just wondering if you can talk a little bit about your expectations might be for Costco going into 2009, whether or not you're scaling back the number of SKUs, becoming more seasonal in terms of the items and that sort of thing?

Robin Marino

It took us a little bit longer than we originally thought it would to get to market on the recipes that we've created because, as you know, we're all about quality, etc. But we've got about eight or nine products coming out into this fourth quarter that we're very optimistic about. Actually Martha and Charles and I are traveling out there this weekend coming to really discuss the potential for our business in 2009. So it's probably premature for me to comment on that, but we still remain optimistic about the potential for Martha Stewart food products. We think that it's a very, very big opportunity for our company.

Michael Kupinski - Noble Financial Group

And I know a lot of attention's been on Macy's, but I was actually curious about your negotiations with KMart and whether or not you want to continue with that relationship.

And then also if you can just give us a little color in terms of the guarantees from KMart this year. Does it look like you are actually going to make your guarantees given the weakness that we're seeing in consumer? Does it look like you're going to make your guarantees this year?

And if you can give us any updates on - if you are looking at other potential retailers for distribution of some of the KMart lines - I was wondering if you can give us any updates on how those negotiations are going.

Robin Marino

Well, let me see if I can cut this into pieces. We will probably make our guidance this year with KMart. I mean, obviously, much depends on fourth quarter performance, but we'll be very close to that number.

We have stated that we will not be going forward with our relationship with KMart, and we've been really hard at work, as you know, on diversifying our Merchandising portfolio. Fortunately for us we've got a brand that has tremendous strength and there are many, many companies, first in class, who want to work with us. And we're hard at work at determining what that's going to look like as we move forward, and as soon as we're finished with that selection process, in the spirit of our partnerships being ready for us to notify everybody, we will.

Operator

Your next question comes from David Bank - RBC Capital Markets.

David Bank - RBC Capital Markets

Howard, could you give a little bit of color in terms of intra quarter trending on the magazine business? You said you are kind of pacing down in the high teens. Is it pretty consistent across September or October, November and December?

The second question is, Wenda, can you talk a little bit about CPMs in the online business and are the drivers right now more kind of sellout focused or CPM focused?

And then this is a question that's going to make it sound like I'm trying to get 2009 guidance out of you, but I'm really not. I would love some color if you have a sense of are most of your advertising clients kind of through the 2009 budgeting process yet and, if so, what kind of general color do you think you could give us surrounding what you're hearing from your clients in terms of '09 budgets and what kind of environment they're anticipating?

Howard Hochhauser

David, I'll take the first one regarding trends in advertising. And as we said in the speeches, Q3 we were down 18% on a comparable basis and then we gave guidance for Q4 to say we're down in the high teens. So the trends are pretty much sequentially about the same, Q3 and Q4. We haven't seen any real diminution as we entered the quarter.

Wenda Harris Millard

On your question on CPMs or sellout, which strategy, David, we have been very focused on making sure that the CPMs, whether it's Internet or any of our other media platforms, are reflective of the quality of the brand, so we have held CPMs on the Internet this year. And as we go into fourth quarter, which is high season for us, the holiday season, I think we'll have a very high sellout. But the CPMs also have held because of the Omni packages. So I think all around holding high CPMs is one of the bright lights for this company regardless of the platform.

In terms of what's going on with '09 budgets with marketers, no, they are not through the '09 budgeting process by and large. I would say that's rare. And what we're seeing is very consistent into the early months of '09, very consistent with what we're seeing now, which is a justintime buying practice. So I haven't seen anything other than that out there in the marketplace; pretty much the same.

Operator

Your next question comes from Michael Meltz - J.P. Morgan.

Michael Meltz - J.P. Morgan

I think I heard you just say you've announced you will not be going forward with the relationship with KMart. I actually had not heard you say that before. Did I hear you correctly and, if so, can you just talk a little bit more about that, please?

Robin Marino

You did hear me correctly. Our agreement with KMart goes through the end of January 2010.

Operator

Your next question comes from Richard Ingrassia - Roth Capital Partners.

Richard Ingrassia - Roth Capital Partners

You mentioned something in your prepared remarks about efficiency initiatives in media sales. Can you elaborate on that a bit?

Wenda Harris Millard

Sure. Well, that's common practice. We're always looking for those. And we look for them in the production area. In circulation we're looking at a variety of different models, exciting ways for us to capture consumers in nontraditional methods and there might be some good efficiencies there. We tightened up the sales organization structure over the course of the summer so that we are leveraging expertise in various categories and across platforms. So those would be the three areas of efficiency that I would say we've been most focused on to date.

Richard Ingrassia - Roth Capital Partners

Do you expect any further staff reductions as a result?

Wenda Harris Millard

Not at this point. I think we're looking at every lever that we have from a cost efficiency standpoint.

Operator

And there are no further questions at this time. Thank you for participating in today's Martha Stewart Living Omnimedia third quarter 2008 earnings conference call and webcast. You may now disconnect.

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Source: Martha Stewart Living Omnimedia, Inc. Q3 2008 Earnings Call Transcript
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